INTERPLAY of LAWS dealing with ECONOMIC OFFENCES (With Emphasis on - - PowerPoint PPT Presentation

INTERPLAY of LAWS dealing with ECONOMIC OFFENCES (With Emphasis on International Transactions)

Ashwani Taneja

(FCA, ACS, AICWA, FICA, DISA, NCFM, LL.B, LL.M) (EX- MEMBER, INCOME TAX APPELLATE TRIBUNAL- MINISTRY OF LAW & JUSTICE-GOVERNMENT OF INDIA)

EMAIL: ashwani@taxindia.net

CASE-STUDY

• 1. FACTORY PURCHASED IN

THE YEAR 2005. 2. ALLEGED VIOLATION OF ENVIORNMENT PROTECTION ACT AND WATER POLLUTION ACT IN THE YEAR 2009. 3.POC ILLEGALLY CALCULATED FROM THE YEAR 2007-08 TILL 2012-13.

• 4. FACTORY ACQUIRED IN 2005

HAVING NO NEXUS WITH POC ATTACHED BY THE ED UNDER PMLA IN 2018

Recent news

Interplay of various Laws Dealing With Economic Offences.

Benami law

SEBI Regulations

3 2 1 4

Companies Act, 2013 Income-tax Act, 1961 Prohibition of Money Laundering Act, 2003 and Black Money law

• Whether Persons acting in

concert are subject to Benami law?

• Implication under Income-tax Act
• n benamidar and beneficial
• wner vis-à-vis the unexplained

investments and credits

• Impact on holding company

structures for denial of beneficial

• wnership criteria
• Property outside India – whether

covered under the Benami law or under Black Money law?

• PMLA invoked, Benami law

applicable

• Significant Beneficial Owners

Reporting

• Dematerialization of shares in

Unlisted Public Company – step to curb benami dealing ?

FEMA, 1999

PMLA, 2002 BLACK MONEY ACT,2015 INCOME TAX ACT,1961

COMPANIES ACT, 2013

PBPT ACT, 1988

SMUGGLING (SCHEDULED OFFENCE)

SEBI Act,1992 Insolvency and Bankruptcy Code,2015

MOST COMMON INGREDIENT FOUND IN VIOLATION OF LAWS RELATED TO ECONOMIC OFFENCES

TRANSACTIONS DONE ARE „BENAMI‟ IN NATURE.

NEW FINDINGS of INVESTIGATION AGENCIES

Benami Transaction – Background

C A

Sale consideration Transfer of title

Factors leading to the origin of Benami law

Fraud on creditors | Tax evasion | Black Money Corrupt practices

Beneficial owner Benamidar Seller

B

C

What is a Benami Transaction?

• Property transferred to
• r held by Benamidar;

and

• Consideration paid by

Beneficial owner; and

• Property held for

benefit of Beneficial

• wner

A

• Property held in

Fictitious Name

• Owner
• Not aware of
• wnership
• Denies
• wnership
• Payer of

Consideration

• Not traceable
• Fictitious

TRANSACTION / ARRANGEMENT

B D

Exception

• Person acting in fiduciary capacity - Executor, Trustee, Partner, Director
• Karta
• Spouse / child
• Brother, Sister, lineal D/A (Jt. Ownership)

Consideration paid out of known sources

Authorities Authorities under Benami law

Adjudicating authority to pass order confirming / revoking the provisional attachment within one year from the date of reference made by the IO

 Conducting inquiries, impound documents  Provisional attachment of property  Grants approval to IO  Pass order confirming or revoking the provisional attachment  Pass order for confiscation of property

Initiating Officer (IO) Approving Authority Adjudicating Authority

Assistant / Deputy Commissioner of Income Tax Additional / Joint Commissioner of Income Tax Bench of three Members chaired by CIT / Joint Secretary

 Review the

• rder passed by

Adjudicating Authority

Appellate Tribunal

Bench of three Members

 To receive and manage the property  To dispose of the property

Administrator

Income Tax Officer

Assistance from other Authorities

Customs and Central Excise Department Income Tax Authorities

Narcotics Drugs and Psychotropic Substances Act

Recognized Stock Exchange RBI Foreign Exchange Management Act SEBI

Central Government, State Government, local authorities or banking companies, notified by Central Government Any „body corporate‟ constituted or established under State of Central Act.

Authorities

„Shell Companies‟ - PMO set up a task force in February 2017 under the

joint chairmanship of the Revenue Secretary and Secretary, MCA

Interplay with Income Tax Act

Whether a transaction subjected to GAAR be also exposed to the Benami Law ? Implication under section 56(2)(x) ? Whether provisions of Benami law can apply to the transaction covered under section 68 and 69A ?

01 02

Whether application of both the law is mutually exclusive or it can be cumulative also ?

04 03

Typical issues in holding company structures

Interplay with Income Tax Act - Holding Structures

• Benefits under tax treaties available to beneficial
• wners
• Beneficial Ownership of Assets and Income of SPV

under challenge under the Income Tax Proceedings

• Can denial of tax treaties on beneficial ownership

criterion be the basis for invoking Benami law?

Burden of showing that transaction is benami lies on the IO

Indian company Hold Co SPV Singapore/ Mauritius Ultimate Parent

Subscription of shares of I Co / ECB to I Co

Beneficial Owner?

100% 100%

Implications under Benami law

• Is the Ultimate Parent a Beneficial Owner?
• Is SPV a Benamidar? Holding Property for the

Ultimate Parent- Consideration provided by Ultimate Parent

• Can shares held in Indian company be held as

Benami Property? Subject to provisional attachment?

• Holding company structures – recognized under

various commercial laws – Can it be subject to challenge under Benami law?

Significant Beneficial Owner disclosure under Companies Act 2013 – uncover Benami holding?

Significant Beneficial Owner (SBO)

Individual – acting alone or together, or through one

• r more persons or trust, possess one or more of

the following rights or entitlements in reporting company

1.

Holds indirectly, or together with any direct holdings, not less than 10% of the shares

2.

Holds indirectly, or together with any direct holdings, not less than 10%

• f the voting

rights in the shares

3.

Has right to receive or participate in not less than 10% of the total distributable dividend, through indirect holdings alone,

• r together

with any direct holdings

4.

Has right to exercise or actually exercises, significant influence or control, in any manner other than through direct holdings alone

Objective threshold Subjective threshold

Key considerations

• SBO required to make disclosures of his

beneficial interest to the Reporting Company, which in turn to be reported to Registrar of Companies

• SBO disclosures would enable the

authorities to “follow the money” in monetary examinations including suspect accounts/assets held by Benamidars

• Holding of persons “acting together” is

clubbed in respect of their shareholding / influence / control. However, this term has not been defined ⎼ For determining situations of “acting together”, can one take reference from definition of “Persons acting in concert (PAC)” from SEBI Takeover Regulations, 2011?

Burden of proof and Intention of the person

• P. Leelavathi (D) v. Shankaranarayana Rao (SC - Civil Appeal No. 1099 of 2008) (2019)
• Burden of proof on the person who assert the transaction is benami which is to be discharged

by legal evidence Mangathai Ammal (Died) vs. Rajeshwari and Ors. (SC - Civil Appeal No. 4805 of 2019) (SC)

• Intention of the person contributed to the purchase money relevant to determine the nature
• f transaction as benami
• The Amendment Act would not be applicable retrospectively

Followed in Smt. Pamela Bhardwaj case by Tribunal under the amended Benami law

Determination of beneficial owner of alleged property prerequisite for treating transaction as Benami

• Prerequisite for determining transaction as benami – identification of beneficial owner of alleged property
• Evidences establishing the genuineness of transaction which are at arm’s length relevant to determine nature of

transaction as benami

• Admissibility of written evidences vs. oral evidence
• Attachment of properties as per rules prescribed

Manpreet Estate LLP (Benamidar) 5 Individuals & 5 directors of Companies RKW Developers (Beneficial owner) DHFL Related party – common promoters, directors and office Developer Seller Employees Lender 1 2 3 4 IO Allegation

• Manpreet Estate LLP (MEL) has taken

loan from DHFL which was related party of RKW Developers P L (RKW)

• Consideration received by sellers

transferred to RKW or to its related concerns

• RKW was beneficiary of development

activity undertaken by MEL on said property

IO v. M/s. Manpreet Estates LLP (FPA-PBPT-206/MUM/2018)(2019)

Land acquisition in India by an NRI (based in USA) (cannot buy agricultural land in India being a non-resident) Remits funds to his friend who is resident in India buys land in his name He (Indian Friend) makes a statement that he is mere facilitator for transactions done by NRI friend Search by ITD takes place

INCOME TAX PROCEEDINGS BENAMI LAW PROCEEDINGS FEMA PROCEEDINGS

MONEY LAUNDERING: The Prevention of Money Laundering Act,2002 defines the offence of Money Laundering u/s 3 as

PROCESS OF MONEY LAUNDERING

STAGE –I COMMISSION OF THE SCHEDULED OFFENCE STAGE-II GENERATION OF PROCEEDS OF CRIME STAGE-III COMMISSION OF MONEY LAUNDERING BY: PLACEMENT LAYERING INTEGRATION

MONEY LAUNDERING INVOLVES 3 STAGES

PLACEMENT

• ASSIMILATING OF PROCEEDS OF CRIME INTO FINANCIAL SYSTEM

LAYERING

• ROUTING OF ASSIMILATED PROCEEDS OF CRIME TO HIDE ITS

SOURCE

INTEGRATION

• RE INTRODUCTION OF THE PROCEEDS OF CRIME SUBSEQUENT TO

ABOVE TWO STAGES TO PROJECT SUCH PROCEEDS OF CRIME AS WHITE MONEY .

PROCEEDS OF CRIME 2 (1)(u):

It is defined as: “proceeds of crime” means any property derived

• r
• btained,

directly

• r

indirectly, by any person as a result of criminal activity relating to a scheduled

• ffence or the value of any such property
• r where such property is taken or held
• utside the country, then the property

equivalent in the value held within the country or abroad;

SCHEDULED OFFENCE The Scheduled Offences are the offences

as prescribed in the schedule to the PMLA, which is divided in 3 parts i.e. Part „A‟ „B‟ „C‟.

The Schedule Offence is the genesis of

the offence of Money laundering, as there cannot be any

• ffence
• f

Money Laundering unless and until an Offence provided in the Schedule of the PMLA has been first committed.

 Section 24:- “In any proceedings relating to

proceeds of crime under this act- a) in case of person charged with offence of Money Laundering, the authority or the court shall unless the contrary is proved, presume that such proceeds

• f crime are involved in Money Laundering.

b) in case of any other person the authority or court may presume that such proceeds of crime are involved in Money Laundering.”

REVERSE BURDEN OF PROOF

LOAN OBTAINED BY FRAUD BANK COMPANY PROPERTY ACQUIRED QUA BANK LOAN ACQUIRED THROUGH FRAUD PROPERTY PROPERTY IS THUS PROCEEDS OF CRIME

Bitcoin scheme floated in the year 2015 which ended in the year 2017 FDR created in the bank in the year 2018 out of funds having no nexus with the scheme FDR attached by ED without identifying any transaction linking POC with the attached property

STEPS INVOLVED in CORRECT APPROACH

ROLE OF CHARTERED ACCOUNTANTS AND TAX LAWYERS IN HANDLING NOTICES AND ATTACHMENT ORDERS ISSUED BY THE ED

 Finding out the source(s) and quantifying amount of Proceeds of

Crime (POC) from commission of an offence

 Identifying the Properties to be attached (acquired with POC)  Identifying the source of such properties and connecting it with the

POC.

 Identifying Loan utilization in the attached property.  Calculation of the correct value of the POC.  Valuation of the property attached and comparison with the alleged

POC.

 Proper Financial Accounting and Analysis.  Preparation of Money Trail for the attached properties to

demonstrate the source(s) of funds.

ASHWANI TANEJA

(FCA, ACS, AICWA, FICA, DISA, NCFM, LL.B, LL.M) (Ex- Member, Income Tax Appellate Tribunal- Ministry of Law & Justice-Government of India)

Email: ashwani@taxindia.net

Ashwani Taneja

(FCA, ACS, AICWA, FICA, DISA, NCFM, LL.B, LL.M) (EX- MEMBER, INCOME TAX APPELLATE TRIBUNAL- MINISTRY OF LAW & JUSTICE-GOVERNMENT OF INDIA)

EMAIL: ashwani@taxindia.net